Saturday, March 3, 2018

The Mises Institute Issues Scathing Attack on Trump's Tariff Proposal

The Trump administration has announced it plans to raise taxes on Americans in the form of tariffs. On Thursday, the president promised steel and aluminum executives that he would protect them against foreign competition by levying tariffs on both metals in the coming weeks: 25 percent on steel and 10 percent on aluminum. The effect of tariffs will be to impose a higher tax burden on Americans, while increasing the cost of living, and the costs imposed on entrepreneurs using the taxed materials.

For centuries, economists have examined and explained the negative consequences of tariffs. And for more than a century, the economists of the Austrian school have added even more sophisticated and modern arguments against tariffs.

Thus, on the matter of tariffs, there is no need to re-invent the wheel.

Now let us look at the matter the other way round, and see the effect of imposing a tariff in the first place. Suppose that there had been no tariff on foreign knit goods, that Americans were accustomed to buying foreign sweaters without duty, and that the argument were then put forward that we could bring a sweater industry into existence by imposing a duty of $5 on sweaters.

There would be nothing logically wrong with this argument so far as it went. The cost of British sweaters to the American consumer might thereby be forced so high that American manufacturers would find it profitable to enter the sweater business. But American consumers would be forced to subsidize this industry. On every American sweater they bought they would be forced in effect to pay a tax of $5 which would be collected from them in a higher price by the new sweater industry.

Americans would be employed in a sweater industry who had not previously been employed in a sweater industry. That much is true. But there would be no net addition to the country’s industry or the country’s employment. Because the American consumer had to pay $5 more for the same quality of sweater he would have just that much less left over to buy anything else. He would have to reduce his expenditures by $5 somewhere else. In order that one industry might grow or come into existence, a hundred other industries would have to shrink. In order that 20,000 persons might be employed in a sweater industry, 20,000 fewer persons would be employed elsewhere.

But the new industry would be visible. The number of its employees,the capital invested in it, the market value of its product in terms of dollars, could be easily counted. The neighbors could see the sweater workers going to and from the factory every day. The results would be palpable and direct. But the shrinkage of a hundred other industries, the loss of 20,000 other jobs somewhere else, would not be so easily noticed. It would be impossible for even the cleverest statistician to know precisely what the incidence of the loss of other jobs had been—precisely how many men and women had been laid off from each particular industry, precisely how much business each particular industry had lost—because consumers had to pay more for their sweaters. For a loss spread among all the other productive activities of the country would be comparatively minute for each. It would be impossible for anyone to know precisely how each consumer would have spent his extra $5 if he had been allowed to retain it. The overwhelming majority of the people, therefore, would probably suffer from the optical illusion that the new industry had cost us nothing.

It is important to notice that the new tariff on sweaters would not raise American wages. To be sure, it would enable Americans to work in the sweater industry at approximately the average level of American wages (for workers of their skill), instead of having to compete in that industry at the British level of wages. But there would be no increase of American wages in general as a result of the duty; for, as we have seen, there would be no net increase in the number of jobs provided, no net increase in the demand for goods, and no increase in labor productivity. Labor productivity would, in fact, be reduced as a result of the tariff.

And this brings us to the real effect of a tariff wall. It is not merely that all its visible gains are offset by less obvious but no less real losses. It results, in fact, in a net loss to the country. For contrary to centuries of interested propaganda and disinterested confusion, the tariff reduces the American level of wages. Let us observe more clearly how it does this. We have seen that the added amount which consumers pay for a tariff-protected article leaves them just that much less with which to buy all other articles.

Hazlitt, of course, was a student of Ludwig von Mises, and developed many of Mises's views. Writing on Mises's essays in Interventionism: An Economic Analysis, David Gordon sums up Mises's view:

Tariffs, and similar measures designed to strengthen the nation, "should not be considered as measures of production policy." They aid some citizens at the expense of others; they do not help the economy as a whole. "One might differ as to the advisability of protecting the Prussian Junkers by a tariff on grain imports against the competition of the Canadian farmers who are producing on more fertile soil. But if we advocate a tariff to protect Prussian grain producers, we are not recommending a measure in favor of the production of the supply of grain, but a measure designed to assist the owners of German land at the expense of the German grain consumers. It will never be possible to base an economic system on such assistance privileges,"

Mises here completely explodes the nationalist argument for protective tariffs. Since these measures do not benefit the totality of the nation, they cannot be unambiguously endorsed from a nationalist point of view. Commitment to free trade, then, need not rest on utopian commitment to internationalism, as some suppose. Given the goal of nationalism, protection does not follow.

But does not the tariff supporter have here a counter to deploy against Mises? He may grant Mises's point: a tariff will benefit some citizens at the expense of others. Nevertheless, he may say, the national interest dictates that the tariff be instituted. Aid to certain groups, it may be contended, is in the national interest.

Mises appears to concede something to this rejoinder, but his concession does the protectionist little good. "Whether such an expenditure is justified or not is of no concern for economic evaluation. ... There are undoubtedly cases in which restrictive measures appear justified to most or all of our citizens. But all restrictive measures are fundamentally expenditures. They diminish the supply of productive means available for the supply of other goods."

Mises's "admission" is in fact a devastating counterargument. Tariffs are never defended by their proponents on the grounds that they privilege some at the expense of others within a nation. Quite the contrary, they are alleged to benefit the nation at the expense of foreigners. Absent an account of the national interest with explicit arguments that justify largesse for special interests, the nationalist defense for tariffs fails utterly.

[P]rotectionism is not only nonsense, but dangerous nonsense, destructive of all economic prosperity. We are not, if we were ever, a world ofself,sufficient farmers. The market economy is one vast latticework throughout the world, in which each individual, each region, each country, produces what he or it is best at, most relatively efficient in, and exchanges that product for the goods and services of others. Without the division of labor and the trade based upon that division, the entire world would starve. Coerced restraints on trade-such as protectionism-cripple, hobble, and destroy trade, the source of life and prosperity. Protectionism is simply a plea that consumers, as well as general prosperity, be hurt so as to confer permanent special privilege upon groups of inefficient producers, at the expense of competent firms and of consumers. But it is a peculiarly destructive kind of bailout, because it permanently shackles trade under the cloak of patriotism.

The verdict of sound economics is universal as to tariffs. They cripple economies, reduce the standard of living, and pit some groups against others while offering no advantages for the economy as a whole:

International protectionism, while obviously less destructive than a policy of interpersonal or inter-regional protectionism, would result in precisely the same effect and constitute a sure recipe for America’s further economic decline. To be sure, some American jobs and industries would be saved, but such savings would come at a price. The standard of living and the real income of the American consumers of foreign products would be forcibly reduced. The cost to all U.S. producers who employ the protected industry’s products as their own input factors would be raised, and they would be rendered internationally less competitive. Moreover, what could foreigners do with the money they earned from their U.S. imports? They could either buy American goods, or they could leave it here and invest it, and if their imports were stopped or reduced, they would buy fewer American goods or invest smaller amounts. Hence, as a result of saving a few inefficient American jobs, a far greater number of efficient American jobs would be destroyed or prevented from coming into existence.

~ Hans-Herman Hoppe

American job losses are not the result of freer trade and an excess of imports over exports, but of government policies that prevent capital accumulation in the United States, among them policies that limit imports. An essential part of any economic policy that would truly help to “make America great again” is to avoid preventing imports.

~ George Reisman

The number of jobs in the steel is exceeded many times over in industries making steel products, from automobiles to oil rigs, refrigerators, locomotives, etc., etc. Tariffs that save jobs in the steel industry mean higher steel prices, which in turn means fewer sales of American steel products around the world and losses of far more jobs than are saved.

~ Thomas Sowell

The primary reason for a tariff is that it enables the exploitation of the domestic consumer by a process indistinguishable from sheer robbery.

~ Albert Jay Nock

Thus the new tariff law has resulted in this: The protected industry now makes a high profit to which it is not justly entitled. The average French citizen has been duped out of five francs by his government, and must therefore do without the article or service he would have bought with it. One segment of the economy has profited at the expense of many others. True enough, because of the artificial price increases, new jobs have been created in the protected industry. But what is not seen is the fact that the extra money now spent for iron must necessarily result in reduced spending for other products and services, and thus fewer jobs in those industries. And worst of all, the people have been encouraged to think that robbery is moral if it is legal.

~ Frédéric Bastiat

In the end, some advocates for protectionism resort to the "nuclear option" of claiming that protectionism is necessary for national defense. These arguments are no more convincing, as Lew Rockwell has shown:

Finally, some people claim that propping up the steel industry is necessary because the nation is at war and war requires steel. Thus, American consumers need to be ripped off to support the munitions manufacturers. But notice that the bomb manufacturers themselves must also pay higher prices for steel, so they aren't being helped. Steel tariffs only make it more costly to build the same weapons the U.S. would otherwise produce in absence of the new tax.

As for the war excuse generally, it could also be cited in defense of complete autarky since there's hardly a producer or consumer good in existence that war planners can't find some use for. When policymakers start talking this way, look out. Most hot wars begin in trade wars. Witness the current war on terrorism, which began with a mass murder driven by revenge against persistent U.S. trade sanctions.

Bush's new tariffs create more enemies and antagonize friends at the very time when the U.S. ought to be doing its best to win friends and influence people in the direction of freedom. Let there be no talk of the "fairness" of these tariffs. Here's a better description of them: a shameless act of mass thievery.

We could go on and on, exploring any number of failed justifications for tariffs from the "infant industries" argument to the need to fight foreign "dumping." In the end, though, American taxes represent an attack on American consumers, American taxpayers, and American entrepreneurs. The Trump administration's tariff policy will reduce real incomes and raise the cost of doing business. There is no up side.